Litigation funding taking off on Wall Street

The prospect of double-digit returns has lured some prominent lawyers to set up litigation finance firms in recent years, bankrolling plaintiffs in exchange for a slice of the potential winnings.
Photo: John Moore

by
NYTimes Dealbook

Litigation finance, an obscure corner of Wall Street, is gaining more interest.

A new firm, Gerchen Keller Capital, has raised $US100 million to invest in high-stakes litigation between companies, becoming the latest investment shop to dive into the relatively new sector.

In Australia, the litigation funder
IMF
(Australia) listed on the ASX in 2000 and has more recently expanded in Europe and the US. IMF rose to prominence by funding the landmark
Aristocrat Leisure
shareholder class action in 2005, and is currently taking action action against Standard & Poor’s for ratings deficiencies on complex derivatives.

Run by four men with backgrounds in finance and law, Gerchen Keller Capital began this year and closed on its first investment this month. The firm plans to invest exclusively in litigation between institutions, whether on the plaintiff or defendant side.

The prospect of double-digit returns has lured some prominent lawyers to set up litigation finance firms in recent years, bankrolling plaintiffs in exchange for a slice of the potential winnings. Some can invest in defendants as well, by advancing legal fees and then collecting a return if the case is successful. Such deals are not loans; if cases are not successful, the investors lose their capital.

Two of the large firms in the field, Burford, started in 2009, and Juridica Capital Management, started in 2007, have listed their funds in London. Two others run by former lawyers, BlackRobe Capital and Fulbrook Capital Management, began in 2011. In 2012, the litigation finance team at Credit Suisse left to form Parabellum Capital.

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The firm’s first investment is with a plaintiff in a commercial case in the United States, but the founders would not reveal more information about the case. The plan is for investments to average about $US5 million.

This type of work requires a combination of legal and financial expertise. “It was a nice marriage of all of our backgrounds," said Adam Gerchen, the chief executive.

Mr. Gerchen and Mr. Keller previously worked together at Alyeska Investment Group, a hedge fund based in Chicago. Before that, Mr. Gerchen was an investment banker at Goldman Sachs, and Mr. Keller was a partner at the law firm Bartlit Beck Herman Palenchar & Scott.

The idea for a litigation finance firm came at Alyeska, where the two men would invest in the stocks of companies involved in legal disputes.

“We thought the next logical step was to cut out the middleman, so to speak, and invest directly in the claims," Mr. Gerchen said.

They left the hedge fund and added two more to their team: Travis Lenkner, a former senior counsel at the Boeing Company, who is the new firm’s chief underwriting officer; and Terrance Carlson, a former general counsel at Synthes and at Medtronic, who is the chairman of the investment committee.

The industry they are entering has come under attack by critics including the United States Chamber of Commerce, which has said these investment firms can inappropriately influence cases or encourage frivolous lawsuits.

But the Gerchen Keller team counters by saying it provides an important service to corporations, and that it selects cases carefully.

“We won’t be successful if we’re investing in claims that we don’t believe have a very good chance of succeeding," Mr. Lenkner said.